While expected to stimulate demand for US military products and encourage investment in vital industries, this shift could potentially diminish the US’ diplomatic leverage traditionally tied to FMS transactions.
The Defence Security Cooperation Agency (DSCA) announced a new policy on 9 August that will allow US allies and partners to use a bank letter of credit as a financing option under the Foreign Military Sales (FMS) programme.
Nations will be able to use commercial financing to complete a number of functions previously conducted using national funds, replacing national funds held in the FMS Trust to conduct routine payments and supplementing national funds in letters of Offer and Acceptance. Purchasing countries can also use the bank letters of credit to secure payment schedules under the Credit Assured Payment Schedules (CAPS) policy codified in January 2023.
US allies and partner nations purchase an average of $45bn in military products and services every year, with FMS sales increasing by 49% between 2021 and 2022, according to the US Department of State, who oversee the FMS programme.
Customers of FMS may obtain loans from a US bank with a minimum “A” credit rating or from a foreign bank operating in the United States with a licence from the Office of the Comptroller of the Currency.
While the congressional notifications is required on sales of major defence equipment that have a value greater $14m, or $25m for sales to Nato allies, 95% of FMS purchases are evaluated and approved by the State Department within 48 hours.